GCC needs to diversify further to cut oil dependence

Dubai: The governments of Gulf Cooperation Council (GCC) economies should step up efforts to develop export-oriented industries as falling oil prices will pose a challenge to their economic growth, according to ICAEW and its research partner, the Centre for Economics and Business Research (Cebr).

"With global oil prices forecast to fall over the medium-term, the need to broaden the industrial base is becoming more pressing. While the GCC economies have the infrastructure and financial means to advance their manufacturing output and export potential, more attention needs to be paid to fostering innovation," said Vernon Soare, executive director of the ICAEW.

GCC economies are now more dependent on commodity exports than they were 10 years ago despite the diversification agenda. Commodities still account for 86.8 per cent of Saudi Arabia's total goods exports by value and nearly two thirds of the UAE's.

Even Bahrain, with the smallest hydrocarbon resources of any GCC economy, relies on commodity exports for nearly three-quarters of goods exports.

Plentiful, cheap energy should provide the Middle East with a competitive edge when it comes to manufacturing. However, modern manufacturing also relies upon skilled workers and high-tech equipment. Middle Eastern economies have, so far, struggled to boost the proportion of their goods export revenues accrued from these activities.

Currently the UAE, Bahrain and Saudi Arabia rank in the top half of the World Bank's Knowledge Index, a comparison of 145 countries and their ability to develop modern competitive industries, coming 41st, 52nd and 53rd respectively. However, with competition from other emerging markets intensifying, the GCC countries must now improve education, increase labour productivity and attract more foreign direct investment, according to Ceber analysts.

While standards of education in the GCC fare slightly better according to World Bank measures, there remains a shortage of workers with suitable education in science, technology, engineering and mathematics (STEM subjects).

Despite strong GDP growth and high oil prices, several of the GCC economies have experienced falling labour productivity for some time, a trend which accelerated after 2009. Average annual labour productivity growth in Kuwait fell from 6.9 per cent in the five years to 2007 to zero per cent in the five years to 2012.

In Bahrain labour productivity has actually fallen in recent years, declining by 1 per cent in 2012 compared to the previous year. Promisingly, the amount of output produced per worker is improving in the UAE with marginal productivity growth recorded in 2011 and 2012. Saudi Arabia, Oman and Qatar have also recorded improvements in productivity over the five years to 2012.

"Strong investment will continue to see growth across the GCC outpace the rest of the world, but the prospect of falling oil prices due to increasing global supply, will put pressure on the GCC economies to diversify and grow their high-tech manufacturing industries," said Charles Davis, director of the Cebr.

The GCC is likely to remain a key destination for global FDI flows in coming years. FDI has seen a sharp increase in the region following the resurgence of Dubai's property markets, Qatar's continued preparations for the 2022 football World Cup and the dramatic infrastructure developments in progress, including the Etihad Railway across the UAE.

"The region will remain a key destination for foreign direct investment flows over the coming years, providing a welcome boost to labour productivity by introducing domestic workforces to new technologies, production techniques and management procedures," Davis said.

Source: gulfnews.com

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